07 May, 2015
Senior Portfolio Manager Roger Garrett tells us why we have recently added Chinese online retailer Alibaba to our International portfolios.
We recently initiated a position in Alibaba Group, the world's largest e-commerce company. Its total merchandise sales across its various platforms are in excess of eBay and Amazon combined. Alibaba is best known for Taobao (pronounced tow bow) which is China's largest online shopping version of eBay or Trade Me where it has a 99% market share and Tmall which is China's online marketplace for retailers, similar to Amazon where they have nearly 60% market share. The company dominates online sales in China, the world's largest e-commerce market, matching 334M buyers with over 8.5M sellers with over one billion product listings.
What attracted us to Alibaba?
Alibaba is a market leader with strong moats and a long growth runway. Their position as the undisputed market leader is assured given both their scale and network is virtually impossible to replicate. Alibaba is to Chinese e-commerce, what Google is to search.
The macro drivers of Alibaba make it an exciting investment opportunity. Consumer spending growth in China is phenomenal with Chinese people joining the middle class resulting in retail spending growth of 10-12% per year. Chinese e-commerce is growing even faster than retail spending since China doesn't have a lot of stores compared with more developed areas of the world, particularly outside the major cities. But consumers do have PCs and mobile phones and can utilise the services of Alibaba to access a wider range and quality of goods than they could otherwise.
Despite the company's strong growth to date, less than a quarter of the overall population and only half the number of online shoppers in China have discovered Alibaba; so further scope exists.
Why have we waited until now to buy Alibaba?
The Alibaba IPO in September 2104 was the biggest in history and was popular to say the least. The IPO price was $US68, it began trading at $US90 and then rallied 176% before coming back down to the $US80 range. We were comfortable staying out of the market until the hype had subsided and the true value of Alibaba could be identified. A few short-term negative factors that have led to price weakness and brought the stock into a more reasonable valuation range have now given us the opportunity to buy. Encouragingly the negative factors are, in our view, short term and able to be addressed, hence our willingness to initiate a position now. The market has focused on the company's speed wobbles as it addresses increasing sales on mobile devices, from which they earn a lower margin than from online PC sales. Facebook, Google and Amazon had similar wobbles which they were able to transition through, and we believe Alibaba will also. Recent price weakness has offered us an opportunity to invest in a high quality growth company that has a sustainable competitive advantage and a very long growth runway.